Investing in Music A Unique Asset Class Opportunity

In recent years, the music industry has undergone a profound transformation, pivoting from traditional sales models to digital consumption. The rise of streaming services and digital platforms has not only changed how we listen to music but also how the industry operates financially. This evolution has opened up new and lucrative avenues for investment, with private equity firms taking a keen interest in the music sector. As music is universal and holds emotional significance for many, this is a unique asset class that investors are increasingly intrigued by due to personal connections and high rate of return. Regardless of where the market stands, people will always love and listen to music.

The Promise of High Returns on Investment

Music has emerged as a new compelling alternative asset class, offering investors the potential for stable, recurring income and portfolio diversification. Music royalties generate regular payments from various sources, including streaming services, radio play, live performances, and synchronization in media such as film and television. In the age of smartphones and digital streaming, the music industry has been transformed into a subscription-based economy, driving year-on-year growth projections and making this asset class even more appealing to investors.

As compared to the pre-digital world, streaming services offer predictable revenue that is particularly enticing to investors. The World Intellectual Property Organization (WIPO) notes that returns from music rights are especially attractive due to their seemingly low correlation with cyclical trends in the overall economy.

Music as an asset class offers:

Stable, Recurring Income: Music royalties generate ongoing cash flows as songs are streamed, broadcast, performed live, or licensed for media. These payments are typically made monthly, quarterly, or semi-annually, and can last for decades —sometimes for the life of the copyright.
Low Correlation to Traditional Markets: The performance of music royalties is largely independent of stock and bond markets. Consumption of music tends to be stable, even during economic downturns, making royalties a valuable tool for portfolio diversification and risk reduction.
Growth Driven by Streaming: The rise of digital streaming has transformed the music industry, stabilizing and often increasing cash flows. Streaming now accounts for the majority of royalty revenue, and the number of global subscribers continues to grow.
Intellectual Property Value: Music catalogs hold significant intellectual property value. Iconic songs and albums continue to generate revenue decades after their release, making them valuable long-term assets. The enduring popularity of classic hits means that these assets appreciate over time, offering both immediate and future financial rewards.
Portfolio Diversification: Major investors, including private equity, hedge funds, and insurance companies, have allocated significant capital to music investments to diversify their holdings and annuities and secure stable, long-term returns.

Valuation Complexity

While music presents exciting investment opportunities, it also comes with challenges and considerations. The music industry is a multi-billion-dollar sector, with its valuation driven by multiple complex elements, including music sales, streaming services, live performances, and licensing deals. Whether it is for estate purposes, a purchase, or a sale, it is critical to fully understand the value of a music asset which requires deep industry expertise and experience.

A valuation of a music portfolio considers several data-driven factors including:

Revenue Streams: The potential earnings from sales, streaming, licensing, and performances.
Market Demand: The popularity and demand for the music in the market.
Vintage of the Music: Music with a historic sense of self or is considered iconic transfers a much higher value to the investor.
Earnings Lifecycles: Past earnings and performance of the music.
Future Potential: The potential for future earnings based on trends and market conditions. New music is currently going through its life cycle from peak to steady state.
Steady state growth rates by income type
Rate of decline
Determination of a market-based discount rate factor for application to future cash flows to arrive at a proper net present value outcome

The Role of Private Equity Firms

Because music is ubiquitous, everyone wants a piece of this incredibly valuable pie. However, the cost of investing in this asset class is extremely high and not suited for small enterprises. As the industry continues to evolve with technology, private equity investors see the potential for innovation driven growth, making it a prime sector for investment.

Every major player in the private equity space is now invested in music. Private equity firms now play a pivotal role in the music industry by providing the essential capital needed for growth and expansion. Their increased involvement often brings about a professional approach to managing finances and operations, enabling artists and music companies to scale their endeavors, tap into wider audiences, and enhance their creative pursuits.

Private equity firms often bring a fresh perspective to traditional music business models, encouraging innovation and efficiency. Their expertise in other industries can be leveraged to introduce new technologies and methodologies, potentially revolutionizing how music is created, distributed, and monetized.

It is important to note that the intersection of music Investors must ensure that financial goals align with artists’ creative visions. Striking this chord is essential to maintain authenticity of the music and avoid over-commercialization, which can alienate fans and ultimately impact long-term financial returns. Investors contemplate value based on a multi-year discounted cash flow model that discounts long range cash flow projections through a market-based discount rate application.

How Citrin Cooperman Can Help

The music industry offers diverse investment opportunities, from acquiring rights to lucrative music catalogs to investing in cutting-edge music technology startups. As the market continues to accelerate with no signs of slowing, there is an incredible opportunity for investing in music as an asset class. Investing in music offers a unique blend of steady, uncorrelated returns, long-term income potential, and diversification benefits for those who have enough capital. Like any investment, it’s crucial to conduct thorough research and consider the risks involved. Citrin Cooperman’s Financial Services Industry Practice and Music and Entertainment Valuation Services Practice assists clients with investment strategies to fulfil strategic goals, with expertise in valuing music for private equity funds. For more information, please contact Alexander Reyes or Barry Massarsky.